PMI was instituted over 30 years ago to allow families to purchase homes with less than the lender required 20% down payment. PMI protects the lender against loss if someone defaults on their mortgage.
Private Mortgage Insurers collect premiums from the borrower. Previously, it was common to collect a full years premiums at loan closing. Today, it is more common to escrow two months of premiums and collect future premiums as a portion of the monthly mortgage payment. If the mortgage is paid off early, the borrower could be due a refund of the prepaid PMI premiums. The amount can be found on the HUD settlement statement. The premiums are on a sliding scale and depend on the original LTV (loan-to-value), loan term, and loan amount. Typical PMI payments, based on a 30-year loan, will add up to approximately 1/4% to 3/4% of the initial loan amount, each year. PMI insurance premiums are not tax deductible. PMI is calculated into your qualifying ratios, makes your monthly mortgage payment higher, and reduces the maximum loan amount you qualify for.
Amendments to the Truth in Lending Act (TILA) contain provisions for mandatory notification to the borrower that it is possible to discontinue PMI. The amendments prevent the lender from allowing PMI to run the entire length of newer (July 29, 1999, and on) mortgages. The problem is that lenders only use the original LTV determined when the mortgage loan documents were executed. Theoretically, when the borrower pays down the mortgage to an 80% LTV the PMI automatically stops. Unfortunately, this method does not take into account any appreciation of the property.
You can challenge your mortgage company to reduce, refund any prepaid, and/or eliminate your PMI premiums. The companies' responses will vary, but will probably involve a new appraisal, paid for by the borrower, to justify the request. From the lender's viewpoint, they cannot be sure the property has not diminished in value. The borrower's request needs to be based on property appreciation, home improvements, and a remaining mortgage balance, which when combined, present a new LTV of 80%, or less.
An alternative is to refinance. If your goal is to eliminate PMI, there are a couple of ways to accomplish this. You may be fortunate enough to reduce your rate while simultaneously achieving a new LTV of 80%, or less. Closing costs usually get in the way. They tend to increase the mortgage balance in a refinance.
One PMI alternative is lender funded closing costs in exchange for a higher rate to avoid increasing the loan balance. Yet another PMI alternative is to use a lender who will give a slightly higher rate in exchange for PMI. This converts the PMI insurance premiums into potentially tax deductible mortgage interest, which is a compromise for those locked into high LTV's. The small jumbo loan customers might be interested in a piggyback loan using an 80% PMI-free conventional 1st mortgage, plus a higher rate PMI-free 2nd mortgage.
Contact us for a free personal consultation to explore your options.
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